Should you choose a short or long-term personal loan?

Published on November 26th, 2020
  Written by 
Bill Tsouvalas
Bill Tsouvalas is the managing director and a key company spokesperson at Savvy. As a personal finance expert, he often shares his insights on a range of topics, being featured on leading news outlets including News Corp publications such as the Daily Telegraph and Herald Sun, Fairfax Media publications such as the Australian Financial Review, the Seven Network and more. Bill has over 15 years of experience working in the finance industry and founded Savvy in 2010 with a vision to provide affordable and accessible finance options to all Australians. He has built Savvy from a small asset finance brokerage into a financial comparison website which now attracts close to 2 million Aussies per year and was included in the BRW’s Fast 100 in 2015 as one of the fastest-growing companies in the country. He’s passionate about helping Australians make financially savvy decisions and reviews content across the brand to ensure its accuracy. You can follow Bill on LinkedIn.
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Personal loans normally vary from 1 to 7 years, with a longer-term loan accruing more interest than a short-term loan. However, if you need a personal loan you should consider all the various factors, such as the loan-term interest charges, deciding whether you can afford this.

personal loan may be a useful tool, since you cannot predict when unforeseen financial problems may arise. It is therefore understandable that the personal-loan market is worth about $26 billion per year, people using personal loans to overcome a shortage of funds. However, deciding on the loan term will depend on your needs, but also on the terms of the loan.

Which is better − a short-term or a long-term loan?

Short- and long-term loans have their own benefits and drawbacks, however, short-term personal loans are seen as the better option. The short-term loans commands a higher repayment charge, but will cost you less interest over the lifespan of the loan compared with a long-term loan. To illustrate, a $10 000 loan at a rate of 8.75% over three years will cost you $634 per month. Over the life of the loan, you would have paid the lender $2812 in interest charges. However, add two more years to the same loan: your monthly costs may drop to $413; however, the overall interest on the loan will reach a whopping $4765.

Long-term personal loans

A long-term loan period is around 5 to 7 years. It allows for financing of more expensive goods such as a car, wedding or higher studies. As the loan period is spread over a longer period than a short-term loan, the repayments are smaller. However, as the period is longer, you will accrue more interest, and therefore your debt will increase more than the short-term loan. In addition, if you want to pay off the loan early, depending on your loan agreement, you may have to pay an early-repayment fee. This fee can range from $0 to $800.

Short-term personal loans

A short-term personal loan works well if you need speedy access to money, for instance, for an emergency. Furthermore, this loan will not take long to process, since there is no collateral needed. This means that you do not tie your property up in the loan, but you will still be held liable if you default on the loan, and you will pay high interest rates. This type of loan is also not prescriptive, which means that you can spend the money on what you want. You just need to pay back the money over a short period. Therefore, not only is the commitment short, but the interest in total will be less than a long-term loan.

Think carefully before making rash decisions

Whatever loan term you select, besides picking a personal loan with competitive interest rate and fees, you should consider your financial situation: how much you can afford to repay monthly, and how long you wish to be committed to the loan agreement. The last thing you want is to spiral deeper into debt because you lack the money to pay back the loan.

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This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.

The content on our website is produced by experts in the field of finance and reviewed as part of our editorial guidelines. We endeavour to keep all information across our site updated with accurate information.

Approval for personal loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.

The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well as others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.

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